Pensions cut = strikes

[Guest pelmetman]

You have just confirmend my opinnion of big business Brian ;-)

 

If the public sector are in parts incompetent 8-) Then big business is wholly corrupt :D

 

PS.......... It's all your fault BM, once they let a Crabfat in the only way was down :D

[Big Momma]

pelmetman - 2011-03-19 7:39 PM

 

You have just confirmend my opinnion of big business Brian ;-)

 

If the public sector are in parts incompetent 8-) Then big business is wholly corrupt :D

 

PS.......... It's all your fault BM, once they let a Crabfat in the only way was down :D

 

Now if I was from your old mob I could understand why everything may have been 'sinking', but coming from a 'higher' level we always kept our standards high :D :D Mind you most 'air jockeys' were of the plum in the mouth variety, you know the ones that take massive early retirement pensions and then join the ' Senior Management' in the Civil service so that they can get an additional 'Gold Plated' Public Sector (Private Sector Funded) pension :D :D :D (just keeping it on topic ;-) )

[Guest pelmetman]

Big Momma - 2011-03-19 8:02 PM

 

Now if I was from your old mob I could understand why everything may have been 'sinking', but coming from a 'higher' level we always kept our standards high :D :D Mind you most 'air jockeys' were of the plum in the mouth variety, you know the ones that take massive early retirement pensions and then join the ' Senior Management' in the Civil service so that they can get an additional 'Gold Plated' Public Sector (Private Sector Funded) pension :D :D :D (just keeping it on topic ;-) )

 

Just as I fort guvnor :D

 

Now if yous ever need an oik to black yer shoes or make somefink stiff and padded to ang at your window, please fink of me ,

 

yours ever so umble Dodgy Dave "touching me forlock your honour" as I back out of this post :D

[Big Momma]

pelmetman - 2011-03-19 9:02 PM

 

Big Momma - 2011-03-19 8:02 PM

 

Now if I was from your old mob I could understand why everything may have been 'sinking', but coming from a 'higher' level we always kept our standards high :D :D Mind you most 'air jockeys' were of the plum in the mouth variety, you know the ones that take massive early retirement pensions and then join the ' Senior Management' in the Civil service so that they can get an additional 'Gold Plated' Public Sector (Private Sector Funded) pension :D :D :D (just keeping it on topic ;-) )

 

Just as I fort guvnor :D

 

Now if yous ever need an oik to black yer shoes or make somefink stiff and padded to ang at your window, please fink of me ,

 

yours ever so umble Dodgy Dave "touching me forlock your honour" as I back out of this post :D

 

Well actually, I am looking for a reasonable oik, what do you lok like with a Cape and Mask my good man, I'm in the market for a new 'Bat Man' :D

[Guest pelmetman]

Big Momma - 2011-03-19 10:04 PM

Well actually, I am looking for a reasonable oik, what do you lok like with a Cape and Mask my good man, I'm in the market for a new 'Bat Man' :D

 

Ok Robin :D ............................It means I'll have to change the name of the "Travelhome" to the "Batmobile" B-)

[Big Momma]

pelmetman - 2011-03-19 10:20 PM

 

Ok Robin :D ............................It means I'll have to change the name of the "Travelhome" to the "Batmobile" B-)

 

And of course your Avatar :D

[CliveH]

Brian Kirby - 2011-03-18 5:33 PM

Apologies, I thought that once I was in the edit screen, the 30 minutes limit was suspended.  Obviously not!  What I was trying to edit it to say, was this:

Above is a picture from a web page at payscale.com, showing median salaries by employer types for the UK.

I have no idea how right/wrong it may be, but hope it may be a useful starting point for a different look at the problem of pensions provision.

It seems useful because, despite some of the statements made on here it shows that, at least for the median, there is not that much difference between the various employer types.

What interests me is what these median earnings mean in terms of pension contributions.  Taking the "Government - state and local" category, at £25,730pa, what scale of contributions would this median salary employee need to make, to retire on (as nearly as possible) 50% salary after 40 years, on a good money purchase pension scheme, under present economic conditions? 

What are the risks, other than death, that might affect his eventual payout? 

For example, he has to contribute to a fund for 40 years.  What reasonable % return should he expect from his fund over that period. 

On, or soon after, retirement, he has to buy an annuity.  What size of pot does he need to achieve his goal of, say £12,750pa pension? 

What level of monthly contribution, at the above rate of return, needs to be maintained for those 40 years, to generate that pot, and how would that typically divide between employee and employer?

How should the inflation risk during his working life be catered for?

How far can he realistically expect to protect his pension from inflation post retirement?

How "safe" is his scheme?  For example, how variable is his fund performance likely to be, and how much does the rate of pension payable vary, depending on when the annuity is bought?

Is it really worth it, and is there a better answer?

I think this is really for Clive, so I apologise for proposing he wastes his time on this exercise, but I think it may be illustrative for many of us (me included), but more particularly may show Rob the difference between what his present scheme provides, which I assume is non-contributory, and what he would have to pay to get close to pension parity were his scheme contributory, of the type suggested.  He, and others, may then begin to see what provokes some of the vitriol on this subject whenever it arises.

If anyone wants to have a look at what annuity rates are on offer then the FSA has a good website http://www.moneymadeclear.org.uk/tables/Which gives some basic comparisons on not just annuities but other financial products as well. They personalise it a bit in as much as you have to put your own details in such as postcode, age and annuity type wanted etc.If nothing else it shows you the value of shopping around and USING you OMO (Open market Option) to get the best annuity deal.I put in a fund of £100,000 and a 60 year old male with a 57 year old wife (trying to hit "Mr Norm") and an annuity that matches as far as is possible the Public Sector pension i.e. - 50% widows pension and RPI, tho I appreciate that this later annual increase has changed - so do note this change. Clearly this government website has not kept up with its own changes!I Got a List of 11 providers that would offer an annuity on £100K with AVIVA offering the highest Level Annuity at £472/month and the RPI linked annuity being much lower at £260 per month.This equates to an annuity rate of 5.6% for the level annuity and 3.12% for the RPI linked one from the highest Provider which in this case is Aviva.A more average provider is the Pru with just £217 a month for their RPI linked annuity which equates to 2.6% annuity rate.Why are RPI annuities lower that level annuities? - because with a finite pot of £100K if you are going to be paid more as time goes on, then to pay you more in later life you have to balance getting less earlier on.Which is why the Public Sector Pensions are so so so generous because the start as a percentage of your final salary, with a generous Tax free cash lump sum and a pension linked to inflation that is mind bogglingly expensive if each individual actually had to pay for it themselves.So to answer Brian’s question:-" What size of pot does he need to achieve his goal of, say £12,750pa pension? "A Public Sector employee, if he had to pay for this themselves from the best annuity provider at this point in time according to the data on the FSA website would get an annuity rate of 3.12%.Thus the fund he would have to accrue (but which he does not of course because aside from the 6% contribution of salary which over 40 years would be just £61,752 even if he was on his £25,730 salary from the day he first started work 40 years ago!) would be:-£12,750 divided by 3.12% times 100% = £408,653 and 85pence.That sum is circa 2.5 times the average house value in the UK.I hope that gives some idea as to why the Public Sector pensions are seen to be overly generous. The amount that each Pub Sec worker pays into the scheme is paltry in comparison to that which the tax payer has to pay on top.(A don't forget that this only covers the actual PENSION! - Each Public Sector employee under the scheme that is only just about to be changed is eligible for 3 times their annual pension as a Tax Free Lump sum - which in this example would be a further £38,250.This £38,250 comes straight out of the taxes.

[CliveH]

Brian Kirby - 2011-03-19 7:16 PM

 

Doing this we had contact with contractors all over the country, and consequently got to know who was good, and reliable, and did a fair job for a fair price. So, you might perhaps expect us to favour those contractors, by ensuring they were always on tender lists? Oooooooh no! You absolutely must not do that. Why? Because the other contractors monitored who got the government contracts, and if they found that only certain firms were favoured they gave ministers, including the prime minister of the day, earache about how unfair it was.

 

Interesting observations Brian but totally the opposite of what happened in the financial industry.

 

Here the old, now defunct Equitable Life managed to get 80% of all Public Sector In-House AVC schemes including the NHS scheme, the civil service In House AVC as well as most of the Local government AVC schemes.

 

http://boards.fool.co.uk/avcs-in-the-public-sector-12079684.aspx?sort=postdate

 

At the time many independent advisers questioned how wise this was given the questions being asked about the financial strength and competence of this life office.

 

One scheme that did seem to see the writing on the wall was the Teachers pension scheme who rejected Equitable Life and went with the Pru.

 

That decision proved to be a very wise one indeed.

 

 

 

 

 

[BGD]

Big Momma - 2011-03-19 3:16 PM

 

Okay, so let's see what the Government are doing now to address some of the issues:

 

Public Sector workers - 3 year pay freeze

 

Public Sector pensions - Much larger contributions and less Pension at the end of it that is the current practice

 

Public Sector Expenditure - Qwango's abolished, Private Sector Consultants charging extortionate rates sacked, Centralising Procurement so that different Government Agencies no longer select their own suppliers meaning that instead of having dozens of service providers supplying the same goods and services at disproportionate costs, a handful of suppliers bid for the work at acceptable prices.

 

Public Sector Workers - 1,000's being made redundant

 

Now to me that say's that actually the Government is doing a lot within the Public Sector to reduce the costs. It will never be enough for some people though will it ? But do not say that things are not being done within the Public Sector to address the issues.

 

However, the majority of the Private Sector is unable to expand and so will not be able to offer jobs to not only those leaving school but also to the 1,000's of Public Sector workers joining the unemployed brigade. Result, more Tax Payers money being used to provide 'Job Seekers' allowances, Housing benefits, NHS Treatments without the extra revenue coming in.

 

It is a vicious circle but at least the Public Sector pensions are being reigned in

 

perhaps we should now move on to the Millions of TaxPayers money that get's given away to non-UK taxpayers in International Aid, money that we are told is not available. We are told that the money we are/will be saving is not sufficient to service even the interest payments on our national debt but that we must all tighten our belts. So whilst we are tightening our belts and sufering let's just give the money we pay in tax to others outside the UK who do not contribute into the system and who will never be asked to pay any of it back.

 

And now that we have cut back the military budget, sacking many of the Armed Forces personnel, mothballing/scrapping Ships, Planes, Tanks etc let's get involved in yet another overseas dispute so that the UK Government can look good on the International stage.

 

And what do we do, complain about Public Sector pensions, ho hum

 

*-)

 

 

 

Sorry mate, completely disagree.

 

You've missed the real size of the problem by a country mile.

 

And here's why:

 

If the Coalition Government succeeded in totally implementing every single one of the cost-cutting measures announced in it's emergency budget (Note: for the avoidance of doubt, I repeat: FULLY implementing EVERY SINGLE ONE of it's cost saving pledges), it would take total Public Sector Expenditure back to the level of spending in 2012/13 to that spent in year.....................?

 

 

2005/6.

 

 

It would cut out only the last 6 years worth of additional bloating of PS costs. It would do nothing to roll back the other 50 years-plus of year-on-year bloating.

 

And that still leaves every taxpayer in the UK having to stump up the money, for generations to come, to repay all the Government borrowings mountain of Bonds, that must be paid back in tranches over the next 30 years.

 

Just to give you some sense of the amount of that debt that has been racked up, on top of all tax receipts, just to keep the PS going, here's another little comparison. It comes straight from the "Blue Book" (the monthly official statement of UK Government accounts):-

 

In the last year of Gordon Brown's Government, to fund the continued existence and yet further continued expansion of the UK Public Sector, on top of ALL tax revenues from all sources that year, they also borrowed MORE money in that one year alone, than all previous Government had borrowed in all year since 1945, ADDED TOGETHER.

More money borrowed in just one year than in all the previous 64 years added together.

All of which has to be paid back with interest using taxes taken from citizens in the coming 29 years as the Bonds issued to borrow it fall due for repayment (with the interest appropriate to that bond too).

 

 

 

 

 

The Coalition have but scratched the surface of the cost-monster that is now the UK Public Sector.

 

[Big Momma]

BGD - 2011-03-21 3:35 PM

 

 

Sorry mate, completely disagree.

 

You've missed the real size of the problem by a country mile.

 

And here's why:

 

If the Coalition Government succeeded in totally implementing every single one of the cost-cutting measures announced in it's emergency budget (Note: for the avoidance of doubt, I repeat: FULLY implementing EVERY SINGLE ONE of it's cost saving pledges), it would take total Public Sector Expenditure back to the level of spending in 2012/13 to that spent in year.....................?

 

 

2005/6.

 

 

It would cut out only the last 6 years worth of additional bloating of PS costs. It would do nothing to roll back the other 50 years-plus of year-on-year bloating.

 

And that still leaves every taxpayer in the UK having to stump up the money, for generations to come, to repay all the Government borrowings mountain of Bonds, that must be paid back in tranches over the next 30 years.

 

Just to give you some sense of the amount of that debt that has been racked up, on top of all tax receipts, just to keep the PS going, here's another little comparison. It comes straight from the "Blue Book" (the monthly official statement of UK Government accounts):-

 

In the last year of Gordon Brown's Government, to fund the continued existence and yet further continued expansion of the UK Public Sector, on top of ALL tax revenues from all sources that year, they also borrowed MORE money in that one year alone, than all previous Government had borrowed in all year since 1945, ADDED TOGETHER.

More money borrowed in just one year than in all the previous 64 years added together.

All of which has to be paid back with interest using taxes taken from citizens in the coming 29 years as the Bonds issued to borrow it fall due for repayment (with the interest appropriate to that bond too).

 

 

 

 

 

The Coalition have but scratched the surface of the cost-monster that is now the UK Public Sector.

 

I don't think my point was that the Government could ever claw back/repay the debt for the last 50 years. I was saying that it at last has realised that it cannot go on the way it was and so is now looking to reduce those costs.

 

I am not sure what it is that people want. Either to put things right now, stop doing the things that were wrong and move forward, which I would suggest is at least realistic and acheivable. Or to continue bashing them over the head with things that they could never in reality put right.

 

It's like getting a child in school who is disruptive to change their behaviour and when they show signs of doing so you then tell them that they must also do something to rectify their previous disruptive behaviour. What do you think their reaction would be ? Sometimes you have to let go of the past to develop and move on, if you continue to use past behaviours to beat them over the head they will just say sod it, what's the point.

 

 

 

 

[Guest pelmetman]

It might sound like we are Public sector bashing BM :D

 

But as the OP asked will the Public sector go on strike to try to preserve the impossible :-S............ If so they will receive no thanks or sympathy from the private sector who have to live in the real world :D

[Brian Kirby]

CliveH - 2011-03-21 2:06 PM ..................Thus the fund he would have to accrue (but which he does not of course because aside from the 6% contribution of salary which over 40 years would be just £61,752 even if he was on his £25,730 salary from the day he first started work 40 years ago!) would be:- £12,750 divided by 3.12% times 100% = £408,653 and 85pence. That sum is circa 2.5 times the average house value in the UK. I hope that gives some idea as to why the Public Sector pensions are seen to be overly generous. The amount that each Pub Sec worker pays into the scheme is paltry in comparison to that which the tax payer has to pay on top. (A don't forget that this only covers the actual PENSION! - Each Public Sector employee under the scheme that is only just about to be changed is eligible for 3 times their annual pension as a Tax Free Lump sum - which in this example would be a further £38,250. This £38,250 comes straight out of the taxes.

Many thanks for that very comprehensive reply Clive, far exceeded what I had thought might be possible.

I believe it is possible for all members of pension schemes to withdraw part of their pot as a lump sum, so is it safe to assume his pot needs to be, say £410,000 + say £35,000 = £445,000 just to keep the numbers simple?

Now comes the tricky bit.  :-)  To accumulate his pot, he will have to pay into a fund during his 40 years working life.  From your knowledge/experience, roughly how much per month would need to be deposited into his fund, and how would that normally now divide between employer, and employee? 

So far, you seem to be producing figures that are at least as frightening as mine were!  :-)

I'm assuming there must be some upside assumption over so long a period, rather than working on present poor returns - but difficult to impossible to foresee?

Then, if we get some idea of how much our average worker needs to put into his pension per month, we'll get some idea of how much he can afford to spend on his house - always assuming he hasn't a big student loan to pay off before he hits 50!

[Brian Kirby]

CliveH - 2011-03-21 3:11 PM

Brian Kirby - 2011-03-19 7:16 PM Doing this we had contact with contractors all over the country, and consequently got to know who was good, and reliable, and did a fair job for a fair price. So, you might perhaps expect us to favour those contractors, by ensuring they were always on tender lists? Oooooooh no! You absolutely must not do that. Why? Because the other contractors monitored who got the government contracts, and if they found that only certain firms were favoured they gave ministers, including the prime minister of the day, earache about how unfair it was.

Interesting observations Brian but totally the opposite of what happened in the financial industry. Here the old, now defunct Equitable Life managed to get 80% of all Public Sector In-House AVC schemes including the NHS scheme, the civil service In House AVC as well as most of the Local government AVC schemes. http://boards.fool.co.uk/avcs-in-the-public-sector-12079684.aspx?sort=postdate At the time many independent advisers questioned how wise this was given the questions being asked about the financial strength and competence of this life office. One scheme that did seem to see the writing on the wall was the Teachers pension scheme who rejected Equitable Life and went with the Pru. That decision proved to be a very wise one indeed.

Ah yes, but you see were were the oiks with professional qualifications, and not the cream of the Civil Service with Rolls Royce brains and history degrees, so we were were profoundly distrusted!  Not generalists, you see, we knew of what we spoke!  :-)

We were also what was termed a "spending department" - which no career Civil Servant would even go near - far too dodgy and dirty for their career prospects!  They dealt with ministers, and handed down the edicts; we dealt with contractors, and passed back the bills! 

For some reason, they could never quite understand why, if a project comprised different types of accommodation, its cost could not be calculated by simply adding together the average cost per square metre for each accommodation type, multiplied by the number of square metres of each type.  Nor, for that matter, could they understand why, if they changed the brief after the contractor had started work, it would cost more on completion than had they changed the brief before the designs were signed off, and would blow the budget!  Could go on: better not!

[Robinhood]

Brian Kirby - 2011-03-21 6:08 PM

CliveH - 2011-03-21 2:06 PM ..................Thus the fund he would have to accrue (but which he does not of course because aside from the 6% contribution of salary which over 40 years would be just £61,752 even if he was on his £25,730 salary from the day he first started work 40 years ago!) would be:- £12,750 divided by 3.12% times 100% = £408,653 and 85pence. That sum is circa 2.5 times the average house value in the UK. I hope that gives some idea as to why the Public Sector pensions are seen to be overly generous. The amount that each Pub Sec worker pays into the scheme is paltry in comparison to that which the tax payer has to pay on top. (A don't forget that this only covers the actual PENSION! - Each Public Sector employee under the scheme that is only just about to be changed is eligible for 3 times their annual pension as a Tax Free Lump sum - which in this example would be a further £38,250. This £38,250 comes straight out of the taxes.

Many thanks for that very comprehensive reply Clive, far exceeded what I had thought might be possible.

I believe it is possible for all members of pension schemes to withdraw part of their pot as a lump sum, so is it safe to assume his pot needs to be, say £410,000 + say £35,000 = £445,000 just to keep the numbers simple?

Now comes the tricky bit.  :-)  To accumulate his pot, he will have to pay into a fund during his 40 years working life.  From your knowledge/experience, roughly how much per month would need to be deposited into his fund, and how would that normally now divide between employer, and employee? 

So far, you seem to be producing figures that are at least as frightening as mine were!  :-)

I'm assuming there must be some upside assumption over so long a period, rather than working on present poor returns - but difficult to impossible to foresee?

Then, if we get some idea of how much our average worker needs to put into his pension per month, we'll get some idea of how much he can afford to spend on his house - always assuming he hasn't a big student loan to pay off before he hits 50!

I've avoided getting involved to date, but the figures being bandied around are so patently misleading, I can't keep quiet any longer.The calculation put forward omits any return on 40 year's of investment, and ignores the fact that (for a contributory pension scheme) employer's contributions often run at double the rate of employee's (and this is across both sectors where a cps is available).You have suggested a rate of 6% for employee's contributions, it just so happens that employer's contributions (for defined contribution schemes) seem to have hit an average of 12% earlier this year. These figures seem reasonably representative of a decent private sector scheme, so, in the interest of equality they should IMO apply to the public sector.Clive has used the "Moneymadeclear" website for some of his research; I would suggest that you could use the calculator at:http://www.moneymadeclear.org.uk/tools/pension_calculator.html...to model these assumptions.Salary £25,730Age 20 nowRetire at 606% employee contribution12% employer contributionNothing additional in pot to start withInflation proofed pension Pension for widow/widowerWe then get the results pictured below, which gives an entirely different perspective - a pension of £12,840 expressed at current prices.Admittedly, there is no lump-sum taken from this, but tweaking the figures only slightly (either a point or two on contribution, or a year or so on retirement) would allow for one of 3 times initial pension. In addition, the pension schemes for the public sector and nationalised industry sectors genearally have a lower administration overhead than a commercial pension fund, potentially allowing for a better return than modelled here.I might question some of the assumptions in the calculator, and it certainly demonstrates a better alignment with career average calculation rather than final salary, so there are still issues to pick with the current inflation proofed, secured, final salary schemes, but they are nowhere near as bad as is being painted here.BTW, has it occurred to anyone that the pension schemes of the current and past public sector and nationalised industries are some of the largest investors in the private sector in this country - it all goes round in ever-decreasing circles.

[Big Momma]

pelmetman - 2011-03-21 6:05 PM

 

It might sound like we are Public sector bashing BM :D

 

But as the OP asked will the Public sector go on strike to try to preserve the impossible :-S............ If so they will receive no thanks or sympathy from the private sector who have to live in the real world :D

 

Yes, understand the OP and your comments and again no argument. As a PCS member I was just trying to say that I have not been asked to go on strike, just to take part in a march on the weekend of 26th March (no pun intended). No overtime either as it is on the weekend. Will the March achieve anything, who knows, I personally doubt it but if everyone just sat on their bums then nothing would ever stop some of the other decisions from just going ahead, but no mention of strikes ;-) (YET !) :D

[CliveH]

If you look in pure money terms Brian then funding rate will be in the region of 21.5% assuming a net growth rate of 9% within the fund. But as we all know, 9% growth is pushing it for a cautious investor especially when the growth within the pension fund is now taxed thanks to dear old Gordon Brown. There are lots of pension calculator tools available on the web. Just make sure you load in the correct benefit structure to match the "Rolls Royce" pension benefits enjoyed by the Public sector as most of the calculation tools tend to use level annuities and %'ages rather than RPI as well as citing 25% of the fund as Tax Free Cash rather than the 3 times multiple of Pension within the Public sector schemes.

 

If, as has happened, the growth rates on peoples pensions get hit and hit hard and on top of that, what little growth they do get gets taxed, then the average person in the Private sector on circa £27K pa has to somehow get funding into a pension plan to the tune of c. £484 a month and no guarantee whatsoever that this level of funding will buy them what they expect when they reach retirement age!

 

If the employee had to fund all of this themselves then with 20% tax relief, this would reduce their take home pay by 80% of that some - £387 per month net.

 

Not many can afford that.

 

And do not forget - this assumes that the individual earns £27K a year, every year for 40 years.

 

Hardly realistic, so the funding in real terms will have to be far higher to reflect actual pay and funding over the years, but within a Final Salary scheme, you just get a percentage of your final salary, so what you contributed to the scheme in earlier years matters little to what you get out of it at the end. The driving force is your final salary. This is why such schemes are called "Defined Benefits" - because it matters not a jot what you pay in. What you get out is a multiple of years of service and final salary.

 

In contrast, the Private Sector Defined Contributions schemes require an actual pot of money to pay out a pension.

 

If your pot gets hit by stock market crashes, taxation and the annuity rate crumbles due to low interest rates and the fact that we are all living longer, then people like me start asking the question "why bother?"

 

One good thing that could come in is the amalgamation of NIC and Income Tax. If that happens it could signal that tax relief on pension contributions could raise to circa 32% for a, now 20% tax payer (i.e. the combined tax hit from NIC and income tax for a BRTP)

 

Now that could make pensions a tad more attractive.

 

[CliveH]

Robinhood - 2011-03-21 6:59 PM

Brian Kirby - 2011-03-21 6:08 PM

CliveH - 2011-03-21 2:06 PM ..................Thus the fund he would have to accrue (but which he does not of course because aside from the 6% contribution of salary which over 40 years would be just £61,752 even if he was on his £25,730 salary from the day he first started work 40 years ago!) would be:- £12,750 divided by 3.12% times 100% = £408,653 and 85pence. That sum is circa 2.5 times the average house value in the UK. I hope that gives some idea as to why the Public Sector pensions are seen to be overly generous. The amount that each Pub Sec worker pays into the scheme is paltry in comparison to that which the tax payer has to pay on top. (A don't forget that this only covers the actual PENSION! - Each Public Sector employee under the scheme that is only just about to be changed is eligible for 3 times their annual pension as a Tax Free Lump sum - which in this example would be a further £38,250. This £38,250 comes straight out of the taxes.

Many thanks for that very comprehensive reply Clive, far exceeded what I had thought might be possible.

I believe it is possible for all members of pension schemes to withdraw part of their pot as a lump sum, so is it safe to assume his pot needs to be, say £410,000 + say £35,000 = £445,000 just to keep the numbers simple?

Now comes the tricky bit. :-) To accumulate his pot, he will have to pay into a fund during his 40 years working life. From your knowledge/experience, roughly how much per month would need to be deposited into his fund, and how would that normally now divide between employer, and employee?

So far, you seem to be producing figures that are at least as frightening as mine were! :-)

I'm assuming there must be some upside assumption over so long a period, rather than working on present poor returns - but difficult to impossible to foresee?

Then, if we get some idea of how much our average worker needs to put into his pension per month, we'll get some idea of how much he can afford to spend on his house - always assuming he hasn't a big student loan to pay off before he hits 50!

I've avoided getting involved to date, but the figures being bandied around are so patently misleading, I can't keep quiet any longer.The calculation put forward omits any return on 40 year's of investment, and ignores the fact that (for a contributory pension scheme) employer's contributions often run at double the rate of employee's (and this is across both sectors where a cps is available).You have suggested a rate of 6% for employee's contributions, it just so happens that employer's contributions (for defined contribution schemes) seem to have hit an average of 12% earlier this year. These figures seem reasonably representative of a decent private sector scheme, so, in the interest of equality they should IMO apply to the public sector.Clive has used the "Moneymadeclear" website for some of his research; I would suggest that you could use the calculator at:http://www.moneymadeclear.org.uk/tools/pension_calculator.html...to model these assumptions.Salary £25,730Age 20 nowRetire at 606% employee contribution12% employer contributionNothing additional in pot to start withInflation proofed pension Pension for widow/widowerWe then get the results pictured below, which gives an entirely different perspective - a pension of £12,840 expressed at current prices.Admittedly, there is no lump-sum taken from this, but tweaking the figures only slightly (either a point or two on contribution, or a year or so on retirement) would allow for one of 3 times initial pension. In addition, the pension schemes for the public sector and nationalised industry sectors generally have a lower administration overhead than a commercial pension fund, potentially allowing for a better return than modelled here.I might question some of the assumptions in the calculator, and it certainly demonstrates a better alignment with career average calculation rather than final salary, so there are still issues to pick with the current inflation proofed, secured, final salary schemes, but they are nowhere near as bad as is being painted here.BTW, has it occurred to anyone that the pension schemes of the current and past public sector and nationalised industries are some of the largest investors in the private sector in this country - it all goes round in ever-decreasing circles.

Actually Robin the growth I assumed in a later post was 9% - which I think - given the recent markets is more than a tad optimistic.As for what drives the £445K fund requirement - this is the current best RPI annuity rate (Aviva) - I was not quoting a return or growth rate required at this point - just the actual fund required.How we might achieve this fund is the subject of a separate later post.As for your calculations - I feel they are not that far from what I am saying - so in fact you rather shoot yourself in the foot here I think? 8-) :-S Because a) you do not cite what "inflation proofing" factor you use in your example, and b) you admit that you are not taking into account the very generous Tax Free cash lump sum paid to the Public Sector but you do assume that "one or two percentage points on contribution could accommodate that"So what shall we do?Should we add 2% to the employer’s contributions?That would make the employers contribution now 13% or 14% if the employee’s contribution is 6%. Which lets face it - is more than double what the employee pays. Which is exactly what I have always said! The employee contributes 6% and the Public sector employer tops this up to circa 20% overall. I dispute the notion that most employers pay 12% - this is pie in the sky I am afraid for the Private Sector. And of course if you are self employed - then total spherical objects :-D A more accurate analysis can be found at:-http://www.creativebenefitsolutions.co.uk/news/average-private-sector-dc-pension-contributions-are-9.7/2133/An interesting quote from this:-"The survey concluded that average employer contributions are 6.2% of employees’ salary. Those most likely to receiving below average employer pension contributions are working in sectors such as retail, media, travel/leisure, as well as telecommunications and technology. The survey also found employers to be more generous in sectors such as voluntary/charity and pharmaceuticals/healthcare, as well as the previously mentioned financial services sector.The survey also found that employers across all 13 market sectors made pension contributions of at least 4% of employee salary."

[Robinhood]

CliveH - 2011-03-21 7:54 PM

 

Actually Robin the growth I assumed in a later post was 9% - which I think - given the recent markets is more than a tad optimistic.

 

As for what drives the £445K fund requirement - this is the current best RPI annuity rate (Aviva) - I was not quoting a return or growth rate required at this point - just the actual fund required.

 

How we might achieve this fund is the subject of a separate later post.

 

As for your calculations - I feel they are not that far from what I am saying - so in fact you rather shoot yourself in the foot here I think? 8-) :-S

 

 

My feet still seem alright to me!

 

My calculations are significantly different to what you were saying in your original post, which I was effectively responding to, where the value of the pot accrued was quoted at £62K. (and ignored employee contributions and any investment income, as I stated). :-S

 

 

 

CliveH - 2011-03-21 7:54 PM

 

Because a) you do not cite what "inflation proofing" factor you use in your example,

 

 

....well, it's not my model, and the link is there for all to see. But, AFAIK, it is using 2.5% p.a.

 

CliveH - 2011-03-21 7:54 PM

 

and b) you admit that you are not taking into account the very generous Tax Free cash lump sum paid to the Public Sector but you do assume that "one or two percentage points on contribution could accommodate that"

 

So what shall we do?

 

Should we add 2% to the employer’s contributions?

 

That would make the employers contribution now 13% or 14% if the employee’s contribution is 6%.

 

Which lets face it - is more than double what the employee pays. Which is exactly what I have always said! The employee contributes 6% and the Public sector employer tops this up to circa 20% overall.

 

 

....but I wasn't trying to demonstrate equality (which is exactly why I pointed out that it did not cover the payment of a lump sum). :-S

 

What I was attempting to demonstrate was that the gap in funding that was originally being put forward, when compared with a comparable private sector example, simply wasn't defensible.

 

Originally (excluding the lump sum) you implied a funding of c£62K, and a requirement of c£409K, which is a huge shortfall.

 

The model indicates (admittedly using my figures, and more on those below), that the pension (utilising comparable private sector, defined contribution practice) is to all intents and purposes, fully funded - the lump-sum, however, isn't. (BTW, your adding of "tax-free" here is a bit much, anybody, regardless of sector, can take a "tax-free" amount out of their pot).

 

I'm not clear where you got the idea I wanted to put the employer's contribution up; the reality is that, in the public sector, most employee's contributions already are, or are about to be, raised above 6% (Civil Service excepted). I simply used the 6% figure to continue Brian's example.

 

Using the model as I have, we are at a point where the pot is only £38K short (out of some £447K). Raising the contribution to above 6%, and allowing for the potential for Public Sector Funds take considerably less p.a. than commercial funds in admin costs (I've seen figures approaching 1% p.a.) then the gap is not large at all.

 

CliveH - 2011-03-21 7:54 PM

 

I dispute the notion that most employers pay 12% - this is pie in the sky I am afraid for the Private Sector. And of course if you are self employed - then total spherical objects :-D

 

A more accurate analysis can be found at:-

 

http://www.creativebenefitsolutions.co.uk/news/average-private-sector-dc-pension-contributions-are-9.7/2133/

 

An interesting quote from this:-

 

"The survey concluded that average employer contributions are 6.2% of employees’ salary. Those most likely to receiving below average employer pension contributions are working in sectors such as retail, media, travel/leisure, as well as telecommunications and technology. The survey also found employers to be more generous in sectors such as voluntary/charity and pharmaceuticals/healthcare, as well as the previously mentioned financial services sector.

 

The survey also found that employers across all 13 market sectors made pension contributions of at least 4% of employee salary."

 

 

Well, the problem is that there are lies, damn lies, and statistics. I used hot-off-the press (two-weeks old) figures from the National Association of Pension Funds, quoting "The average employer contribution to defined contribution pension schemes rose from 11.5% in 2009 to 12% in 2010".

 

The figures were broadly borne out by a quick check of a number of firms current arrangements.

 

You pays your money (or not :-) ) and you takes your choice.

 

Even at the end of this Clive, I still don't pretend all is equal. As I've already posted:

 

I might question some of the assumptions in the calculator, and it certainly demonstrates a better alignment with career average calculation rather than final salary, so there are still issues to pick with the current inflation proofed, secured, final salary schemes, but they are nowhere near as bad as is being painted here.

 

I stand by that statement - the gap is much (much) less (for the average public sector worker) than appeared to be being painted.

 

 

B-)

[CliveH]

Robinhood

 

No idea where you get the 12% employer contribution figure you quote for Defined Contribution schemes

 

http://www.statistics.gov.uk/cci/nugget.asp?id=1278

 

Indicates a very different picture.

 

As does this Citywire article:-

 

http://citywire.co.uk/money/public-sector-pensions-are-still-a-great-deal/a479534

 

and the figures quoted are pretty much pro rata with those I calculated.

 

"‘The truth is that adequate pensions are expensive and public sector schemes currently pay pensions to 3.1 million pensioners, so the amount of money involved is vast.’ He points out that the gap between contributions and pensions paid is growing. ‘Typically the government makes an employer's contribution of 14% of salary on top of the employee's contribution. But still the Office of Budget Responsibility is forecasting that the Treasury will need to top this up by £4 billion next year, rising to over £10 billion in 2015/16 to meet expected pension payments.’

 

The unions regularly trot out figures for average public sector pensions, saying that just over 1.5 million public sector pensioners receive less than £5,600 a year and the average pension across all schemes is £7,841. But these figures are based on pensions in payment and although most public sector pensions are now index-linked, a large proportion of these individuals will have retired many years ago on salaries which were very much lower than today’s.

 

‘A 65 year old woman would need a pension fund in the region of £215,000 to obtain an annuity that would deliver an equivalent pension to that of the average public sector worker,’ (£7,841 a year)’ Riddle explains. ‘With the average salary in the UK at £26,000, amassing that amount of pension saving in a defined benefit pension scheme is unachievable to all but a few.’

 

....................

 

So based upon the figs in the above paragraph - a 65 yr old lady needs £215K to drive out a £7841 pa annuity directly equivalent to a Pub Sec pension of £7841.

 

In my figs a 60 year old male with a spouse 3 years younger needs circa £450K to drive a pension of c. £13,700.

 

27 plays 33 – which given the age difference, the gender and the spouses pension is spot on. :-S

[CliveH]

I have now looked at the NAPF article - but i still do not recognise the 11.5 and 12% figures. They fly in the face of my own experience with employer DC schemes. As well as other sources it seems.

 

However i did notice that whilst the article does quote these figures - that i have to dispute and will try to seek clarification for what to me seems to be a very high figure indeed - it (the article) actually covers the very point to which some of us allude to in the post:-

 

.......................

 

"A record number of final salary pension schemes have closed their doors to future contributions from existing members, the NAPF revealed today.

 

Our latest Annual Survey showed that one in five (17%) schemes have shut their pension to both new and existing members. This was a record jump from 7% in the previous survey in 2009, and just 3% in 2008.

 

The findings point towards a new phase in the decline of final salary pensions, as schemes that have already closed to new joiners now look to make restrictions on existing members.

 

Over the past decade, final salary pensions have come under huge pressures due to rising longevity, poor market returns, and red tape. Just 21% of private sector schemes are now open to new joiners, compared with 88% ten years ago.

 

The latest Annual Survey, run in late 2010, shows that further rapid change is on the cards. A third (33%) of schemes are planning changes around their existing members, including cutting benefits or migrating staff to a defined contribution pension.

 

On the day that the NAPF’s annual Investment Conference opens in Edinburgh, Chief Executive Joanne Segars said:

 

“The pressures on final salary pensions are relentless, and their rate of decline seems to be shifting into a new gear. The rate of closures to new staff seems to have levelled off, but now those who are already in a final salary pension increasingly find themselves being locked out.

 

“Many people will feel aggrieved that they can no longer build their final salary pension up. The alternative on offer could still provide a good retirement, but only if contributions are set at the right level."

 

[Robinhood]

CliveH - 2011-03-21 9:47 PM

 

I have now looked at the NAPF article - but i still do not recognise the 11.5 and 12% figures. They fly in the face of my own experience with employer DC schemes. As well as other sources it seems.

 

 

As I said, Lies, Damn Lies and Statistics.

 

I suspect that part of the answer, at least, comes from the trend you have noted. I'd already used the National Statistics site (with which I am very familiar) but the figures were well out of date.

 

However, you will note that it quotes average private sector defined benefit employer contributions in 2008 at 16.6%. As you've noted, these schemes have been closed rapidly over the last two years, and substituted by defined contribution schemes.

 

In doing this, however, many employers have not reduced contribution levels, they have simply changed the rules on what they buy, in order to make the scheme(s) more solvent (and avoid further deficits). As a result, the average employer contributions to defined contribution schemes have risen, since the higher contributions have effectively switched sides.

 

Rather mirrors what the Hutton reports (warts and all) is trying to do for the public sector.

 

 

[Colin Leake]

I feel sorry for the next generation. They are going to come out of university with big debts to pay off, then they need to save a big deposit to get on the housing ladder, then make significant contributions to ensure a reasonable pension.

 

I was born in the early 1940s, came out of university with no debts and enough money to get married on (Village hall reception and a honeymoon in the UK in a caravan), had started a family and bought a house on a mortgage at 23 (£5000). By 36 we had paid it off and doubled the size of it by 40. Having done that we had the disposable income left to set up some useful pension funds.

 

We helped our kids to get on the housing ladder just in time before doing so got really difficult.

 

Our generation really did have it good even if our expectations were lower than those of the current generation.

[Brian Kirby]

My thanks to both Clive and Robin for the further clarifications and detail.  Too much detail for me, I'm afraid!  :-) 

However, in broad terms, it seems that if our hypothetical public employee contributed to a funded, inflation proofed, money purchase pension with provision for his widow, he could perhaps equal the likely pension he would receive under his presumed non-contributory public service scheme if he made contributions of £120 per month (about 5.75%), and his employer of £240 (about 11.5%) per month, without taking account of the effect of employee's tax advantage (or a presumed employer's tax advantage).  If this were upped to £150/£300 per month, a 25% lump sum could be taken, leaving a similar pension of about £13,000 per annum.

However, the 25% lump sum (in excess of 100,000) would comfortably exceed the lump sum he might have received from his employer, fixed at 3 x his payable pension (say £40,000), so I think these figures too high, with £130/£260 being more realistic, say 6.25%/13.5% of salary, if the 33/66 ratio is maintained.  So, net contributions of around £100 per month (£1,100 - £1,300pa), after tax taken into account.

The obvious problem with that, is affordability.  The higher his pay the more he will contribute, but the more affordable his contributions should become.  If that is the realistic cost of a reasonable pension relative to income (Questionable, I think, because those on low pay would need a pension far closer to their actual pay than, say, our friends in the banking sector.), then it might be accommodated if everyone knew from day one of their first job that was the cost of their pension, and the cost was built in to everyone's thinking.  Trying to hit people (and firms) with those sorts of provisions in mid employment, when all their plans have been based on a different model, will hardly result in industrial harmony in whatever sector.

So, is the notion of a pension at 50% of salary (ignoring the debate of whether final or career average) unrealistic and unaffordable?  If it is, what is the solution to financing retirement?  Can only the well paid afford pensions, while the less well paid (who often do more physically demanding jobs) have to work 'till they drop?

Dave (Pelmetman) asked somewhere above why our kids needed degrees.  I think it's beginning to look as though the answer may be: so that they can retire!  If not, then what?

[Guest pelmetman]

Brian Kirby - 2011-03-22 7:15 PM

Dave (Pelmetman) asked somewhere above why our kids needed degrees.  I think it's beginning to look as though the answer may be: so that they can retire!  If not, then what?

 

Cor!..........Glad I ain't very bright with a degree or I'd be working full time until I'm 80 :D

 

As for pensions I'm investing in poufes, even if they dont make my fortune at least I'll be able to put my feet up (lol)

[Robinhood]

Brian Kirby - 2011-03-22 7:15 PM

 

Trying to hit people (and firms) with those sorts of provisions in mid employment, when all their plans have been based on a different model, will hardly result in industrial harmony in whatever sector

 

 

...which is why effort is often expended to soften the effect on those who have least time to react.

 

For example, when closing a final-salary scheme to existing members, and, say, moving them all to a career-average salary scheme, this has often been softened by (as is conventional) banking the existing benefits in terms of service to date and "final salary" at closure of the scheme, and basing the ongoing "career average" scheme on a starting salary equal to that at the time of change (not the salary at entry to employment). Hence, the diminution of overall benefits from the change is inversely proportional to the number of years to retirement (i.e. the amount of time people have to be able to adapt their finances). (The point being that many people's average salary over say the last 4 or 5 years to retirement in the new career-average scheme will not be significantly lower than their final salary).

 

I haven't read the Hutton report in any great detail, since it affects me in no way whatsoever - but I believe that this type of "soft-landing" approach is being championed therein.

 

Brian Kirby - 2011-03-22 7:15 PM

Dave (Pelmetman) asked somewhere above why our kids needed degrees.  I think it's beginning to look as though the answer may be: so that they can retire!  If not, then what?

 

 

Given that the calculations put forward by all above can only be described as "back of fag-packet" and are dependent on so many trends and assumptions, our kids are going to need degrees to be able to work out if and when they will be able to retire.